How To Afford a Mortgage With Student Loan Debt

College graduates with a student loan debt burden greater than $25,000 are less likely to own a home than those with smaller financial burdens, according to a study released earlier this year by Goldman Sachs Group Inc.

Many young adults are burdened with high student loan debt levels that can offset the salary boost provided by a college degree. Fortunately, Goldman analysts suspect this issue will subside as the millennial generation gets older and enters the housing market.

There are two opposing views of the impact of student loans on the mortgage market. On the one hand, if you have no credit history, a student loan can help you establish good credit and help you learn how to make wise financial decisions.

On the other hand, student loans can decrease your purchasing power early on in your career. This article will outline some of the major points that could affect your ability to buy a home, and how to ensure your student loan debt doesn’t keep you from realizing one of life’s major goals.

How student loan debt affects mortgage lending:

The first thing for prospective homeowners to understand is their debt-to-income (DTI) ratio. This is one of the most important factors a bank will consider when buyers are applying for a mortgage. This is how lenders/banks calculate your ability to pay off a new loan. DTI is determined by adding up your total monthly debt (including the projected mortgage payment) and then dividing it by your total monthly income. The lower your DTI ratio is, the better chance you have of being approved for a mortgage.

It should be noted that new rules for FHA-backed mortgages — one of the most popular options among first-time homebuyers — could make it tougher for borrowers with deferred student debt to qualify.

Your credit score is another important factor that determines whether your mortgage application will be accepted or rejected, and whether you’ll be offered a competitive interest rate. Paying your loans on time is a great way to build credit and a strong credit score. Missing, skipping or defaulting on a loan will impair your credit score and prevent a bank from granting a mortgage loan.

If you think you are ready to buy a home:

Which comes first, the down payment for your home or paying back loans? Saving for a down payment can seem daunting while still repaying your student loans, but it can be done.

If you’ve already saved up, think about whether you want to use that money for a house or to pay off student loans. If you have high interest student loans, it would be beneficial to pay off those loans before buying a house or refinance student loans to a better rate. Now if you are unsure whether your student loan interest rates are high, check out Credible's handy tool to compare your rate. If you have low interest loans already, consider putting that money down for a house. Just like your student loans, make sure that you believe you can make your monthly payments long term.

If you need financial assistance:

There are some tips and tricks for student loan borrowers who hope to buy a house regardless of the amount of debt you carry. First and foremost, avoid delinquency at all cost because it will affect your credit score. Delinquencies are determined differently for federal and private student loans; federal loans usually have a 60-day grace period of no payment while private loans can be declared delinquent after only one missed payment.

The second is to defer student loan payments, or change your repayment plan, when preparing to apply for a mortgage. With a federal or private student loan consolidation you can change your repayment length and thereby reduce your monthly payment and lower your debt-to-income.

If you all already behind on your payments or fear it may come to that there are other alternatives. The first step is to contact your loan holder to see what your options may be. It is possible to correct any issues and bring a loan out of default and back up to date by deferring payments or switching plans. Learning as much as you can about your student loans can help create a more stable financial future and put you one step closer to home ownership.

A recent study by property portal Zillow found that among borrowers who have an associate’s degree or no degree, student loan debt reduces the likelihood that they’ll be home owners. But Zillow concluded that those with four-year or graduate degrees are less likely to be deterred from their dreams of home ownership.

To learn more about your student loan repayment options, visit Credible.

Kristen Caron is a member of the DailyWorth Connect program. Read more about the program here.